The present invention pertains generally to systems and methods for factoring of accounts receivable by businesses. More particularly, the present invention relates to a system and method for obtaining confirmation of a receivable claimed by a business that wishes to factor that receivable to a third-party factor.
“Factoring” is a financial transaction in which a business sells one or more of its accounts receivable represented by, for example, an unpaid invoice. To raise working capital or to improve or sustain cash flow, the business will sell the accounts receivable to a third-party “factor” at a discount in exchange for immediate cash. If and when the factor collects the receivable, the factor earns a fee represented by the difference between the discounted purchase amount and the amount collected.
A factoring transaction is different from a loan transaction in that the emphasis is on the value of the receivable rather than on the credit-worthiness of the business. Also, factoring involves three parties: (1) the debtor that owes the receivable to the creditor; (2) the creditor (i.e., the business selling the receivable); and (3) the factor (the entity that purchases the receivable from the creditor at a discount).
The sale of the receivable transfers ownership to the factor, such that the factor acquires the rights and risks associated with the receivable. Thus, an important component of many factoring relationships and transactions is supplying confirmation to the factor that the receivables to be sold by the business are legitimate and are owed by the debtor in the amount stated on the invoice.
Conventional systems and methods for confirming accounts receivable in factoring transactions are similar to those used in the audit confirmation process, meaning that they are primarily manual processes. Further background and explanation of these conventional paper-based confirmation processes and their limitations and weaknesses are described below in the audit context. The debtor is analogous to the financial institution (i.e., responder), the creditor is analogous to the client, and the factor or receiver is analogous to the requestor (i.e., auditor).
Every year, public and private companies throughout the world have their financial statements audited. In the confirmation process of an audit, public accountants or auditors typically confirm with third parties items on the balance sheet and income statement. These include, but are not limited to: assets, debt, receivables, payables, investments and transaction details. This confirmation process is the one step still being completed using paper by accounting firms. The current practice is to send paper confirmations via the post office requiring the manually filling out paper-based confirmation forms. This is typically completed by the financial institution's clerk or the receiving company's staff, who then returns the paper confirmations by mail or fax to the auditor.
Today, the confirmation process comprises numerous manual steps. The confirmation process begins when the audited client or auditor fills out a paper confirmation request form supplied by the client's auditor. The current industry practice is to send paper confirmation request forms by mail, overnight delivery, or other like carriers. Once received by a financial institution, such as a bank, brokerage, or receiving company, the arriving mail is then privately sorted, hopefully routed to the appropriate department or departments, and usually dispatched to hired staff engaged in accommodating such requests. Once the confirmation is in proper hands, the task is generally viewed as a tedious process requiring manual, accurate, and prompt completion.
Financial institutions vary in how they process confirmation, though larger financial institutions have one or more centers devoted solely to processing confirmations. Additional costs are incurred during certain periodic business cycles (e.g., end of year) when the employees work overtime and/or employ temporary staffing to meet the demand of answering confirmations.
Currently, when the manual paper confirmation process works optimally (60% to 80% of the time), it takes a minimum of 2 to 3 weeks to complete. When there are complications (reported 20% to 40% of the time), such as incorrect statement date, incorrect account balances, or no response to the request for confirmation, etc., the process can take up to 4 to 6 weeks to complete. Invariably, with such complications, the costs are increased to the financial institutions, accounting firms, and the client being audited increase.
Today, many accounting firms perform portions of the audit process using electronic communications, except that third-party confirmations remain paper-based. Many accounting firms that have not adopted the paperless process are also now moving to a paperless audit, barring the one process (e.g., confirmations) that is still performed manually using paper. This step includes the confirmation of items include the assets, debt, investments, receivables, payable, and transaction details. Consequently, there is a need to further reduce costs associated with auditing by automating the step of confirming cash, receivables, and payables balances.
The paper-based confirmation process of confirming information leaves an opening for fraud, thus creating increased liability for the auditor. For instance, in the current paper confirmation process, most accountants ask the client to fill out the paper confirmation form, or ask the client for the mailing address and contact name for where and to whom the confirmation should be sent. The auditor then mails that confirmation to the financial institution to be filled out. The auditor typically abides to certain procedures in sending out that confirmation.
First, confirmations usually cannot be mailed out from or faxed back to the client's office. This is to protect the integrity of the confirmation process. The auditor cannot give the client access to the confirmations after the client has filled out the form for fear the client may intercept them and alter the information. This can pose a problem if the auditor's office is not in the same city or even the same building as their client. If the confirmations are mailed back from the financial institution to the auditor's office, the auditor must either go back to his or her office to retrieve them, or have someone in the office forward the confirmations via mail to the auditor's hotel or designated location. If the confirmations are faxed back from the financial institution, the auditor must either stand by the fax machine waiting on the financial institution to fax them back so the auditor can witness the confirmations as they are received over the fax machine, or the auditor must use an off-site fax machine, at an independent copy center. Such centers typically charge for this service adding additional cost to the audit process.
Second, the auditor is usually not allowed to send confirmations to a post office box for fear the post office box is not really the financial institution's address, but rather a third-party who is attempting to defraud the company or auditor.
Additionally, the conventional confirmation process is subject to other fraudulent practices. Currently, in the conventional process the auditor instructs the client to fill out the paper confirmation before it is sent for confirmation. This includes directing the client to fill out the proper financial institution address. Most accountants rely solely on the client for this information and do not employ any system for countering incorrect information supplied by the client. As it stands now, the client, in an effort to deceive the auditor, could use any erroneous address, which would suggest legitimacy, as long as it is not addressed to a post office box. The auditor may then, unknowingly send the confirmation to the client's own house, erroneous address, friend or relative thus perpetuating and facilitating fraud. The lack of checks and balances in the current process allows for an information imbalance thus creating a liability for the auditor. There is no timely or convenient mechanism to ensure that the address on the confirmation is a valid address, nor is it practical for accountants to verify the information themselves.
Thus, there is a need for third-party confirmations of accounts receivable to be performed in a timelier manner so as to facilitate the factoring process.